Tax

The Section 409A Valuation: Do You Really Need One?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note: The following post is authored by Foley & Lardner LLP]

Yes. You do. That was easy. But perhaps we have gotten ahead of ourselves and we should start at the beginning of the story. While Section 409A is a tax provision, its genesis was the perceived abuse of deferred compensation arrangements by rapacious executives in the Enron and WorldCom debacles. Like the “golden parachute” rules of Section 280G, Section 409A is intended to work some good old-fashioned social engineering magic through the tax code. It was quite handy that these rules also made the IRS happy as Section 409A works in part by reigning in the ability of employees to “manipulate” or select the year in which they would have to recognize taxable income from various types of deferred compensation schemes. You see, the IRS does not like taxpayers to have any flexibility when it comes to the timing of recognition of income. Section 409A succeeded in achieving some of its narrow objectives but as is often the case, in ways that likely went well beyond the specific concerns that the statute was originally intended to address. The treatment of stock options under Section 409A is one of those unfortunate extensions. Regardless, we now have to live with these rules.

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OECD’s Top Three BEPS Priorities

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

This month the OECD released an action plan to reduce abusive base erosion and profit sharing (BEPS), which diminishes taxes paid in the world’s leading economies.  Yesterday the head of the OECD’s division for tax treaties, transfer pricing and financial transactions said that the OECD’s top three BEPS priorities are hybrid mismatches, interest deductibility, and transfer pricing.  (more…)

Three Things a Private Fund Should Know About FATCA and Its New Effective Dates

By Kirkland & Ellis LLP | Posted on

[Editor’s Note: The following update is authored by Kirkland & Ellis  LLP]

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, imposed burdensome federal income tax reporting and withholding obligations on many business enterprises (including private funds and their portfolio companies), intended to prevent U.S. citizens and residents from avoiding U.S. income tax by hiding ownership of U.S. assets overseas. (more…)

The Role of Managers in Corporate Tax Avoidance

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

A recent article by Dan Amiram, Andrew M. Bauer, and Mary Margaret Frank examines the issue of corporate tax avoidance as a product of incentives.  The authors suggest that “corporate tax avoidance by managers is driven by the alignment of their interest with shareholders.”*  The tax role of the manager is made clear by studying the “effects of corporate tax avoidance on shareholders’ after-tax cash flows” in both classical tax systems and imputation tax systems.  The authors conclude that there is higher corporate tax avoidance in classical tax systems if managerial and shareholder interests are closely aligned. (more…)

Recent Lessons on Management Compensation at Various Stages of the Chapter 11 Process

By Kirkland & Ellis LLP - James H.M Sprayregen, Christoper T. Greco, and Neal Paul Donnelly | Posted on

[Editor’s Note:  The following Post is authored by Kirkland & Ellis LLP’s James H.M Sprayregen, Christoper T. Greco, and Neal Paul Donnelly.]

Setting compensation for senior management can be among the most contentious issues facing companies reorganizing under Chapter 11 of the US Bankruptcy Code. Corporate debtors argue that such compensation—often in the form of base salary, bonuses, or stock of the reorganised company–helps retain and incentivize management, whose services are believed necessary to achieve a successful reorganisation. Creditors, by contrast, may be loath to support compensation packages that they perceive as enriching the very managers who led the company into bankruptcy.

This tension over management compensation, though long present in corporate bankruptcy cases, has been more pronounced since 2005, when the US Congress added Section 503(c) to the Bankruptcy Code. Section 503(c) limits bankrupt companies’ freedom to give management retention bonuses, severance payments, or other ancillary compensation. For instance, under the current regime, a company cannot pay managers retention bonuses unless it proves to a bankruptcy court that the managers both provide essential services to the reorganising business and that they have alternative job offers in hand. Even then, the Bankruptcy Code caps the amount of the retention bonuses. Severance payments to managers are similarly restricted by Section 503(c).

Despite these restrictions, companies continue to search for ways to boost managers’ compensation in and around the time of bankruptcy. They do so because retaining existing managers is often the best way to maximise the value of the company in a restructuring. Existing managers typically have valuable institutional knowledge and industry-specific experience that is hard to replace. They may also be vital to preserving relationships with customers, employees, and suppliers. Recognising their value, leaders of bankrupt companies often demand incentives to stay on during bankruptcy. Even where a company would prefer new management, it can be hard to recruit top people to a bankrupt company undergoing a restructuring. Companies must therefore choose how and when to compensate managers without running aground on Section 503(c) and related provisions of the Bankruptcy Code.

Click here to read the complete story.

Firm Advice: Implementing Dodd-Frank

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

The comment period recently expired on the Federal Reserve’s proposal to require foreign banking organizations with at least $50 billion in global assets and $10 billion in U.S assets to form an intermediate holding company for most of their U.S. assets.  The proposal is part of the Board’s implementation of Sections 165 and 166 of the Dodd-Frank Act. In a recent Client Alert, Gibson Dunn advises that “the IHC requirement likely exceeds the Board’s legal authority in implementing Sections 165 and 166 of Dodd-Frank, has the tendency to increase, rather than reduce, financial instability in the United States and globally, threatens other adverse effects, and does not effectively respond to the developments that the Board perceives in the U.S. operations of FBOs and in international banking regulation generally.” Gibson Dunn explains why here.

On April 10th, the White House released its proposed budget, which contained significant new tax proposals. While often general, the budget laid out specific proposals for: 1) the Buffet Rule, 2) marking to market of derivatives, and 3) alternative treatment for debt purchased on the secondary market. Skadden’s recent Client Alert explains the various proposals and both their foreign and domestic tax implications.

New Regulations Announced: Foreign Account Tax Compliance Act

By Constance Descout, L.L.M. Candidate 2013 | Posted on

The U.S. Department of the Treasury and the Internal Revenue Service have released long-awaited final regulations implementing the Foreign Account Tax Compliance Act (“FATCA”).

Congress enacted FATCA in 2010 as part of the Hiring Incentives to Restore Employment Act (the “HIRE Act”), and it is housed in Sections 1471 through 1474 of the Code.  FATCA creates a new tax information reporting and withholding regime for payments made to certain foreign financial institutions and other foreign persons.  FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.

This Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.  For instance, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.  The thresholds for taxpayers who reside abroad are higher.  For instance, a married couple residing abroad and filing a joint return would not file a Form 8938 unless the value of the specified foreign assets they hold exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.  Instructions for Form 8938 provide further information, including details on the thresholds for reporting, what constitutes a specified foreign financial asset and how to determine the total value of relevant assets.

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The Week in Review: FB, BNY Mellon, and Cybersecurity

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Facebook (FB) has cleared an important legal hurdle, as a S.D.N.Y. district court dismissed a lawsuit regarding its fumbled IPO last May.  The plaintiffs had argued that CEO Mark Zuckerberg and other directors should be liable for selectively disclosing negative measures of the company’s performance.  Judge Sweet disagreed.  Unsurprisingly, a Facebook representative said they were “pleased with the court’s ruling.”  For more, see CNBC.

The IRS won a major case in U.S. Tax Court earlier this week, and the ruling could cost the Bank of New York Mellon more than $800 million.  The dispute arose from Structured Trust Advantaged Repackaged Securities (STARS) – essentially manufactured tax shelters marketed by the bank.  In ruling against BNY Mellon, the Court held the STARS program was a “subterfuge for generating, monetizing and transferring the value of foreign tax credits.”  For more, see the Wall Street Journal.

In a follow-up to a previous Network post, President Obama has signed an executive order on cybersecurity.  However, the President’s order does not reach tough new regulations on private companies, falling short of last year’s proposed legislation, and does not allow for broad information sharing with government intelligence agencies as proposed by CISPA.  Congressional reaction to the executive order is yet to be determined—some commentators view the move as taking pressure off Congress to act on cybersecurity this term, but even President Obama, in his State of the Union address last night, addressed the need for a comprehensive law.  For more, see CNET and BBC.

IRS Faces Setback on Path to Regulation of Tax Preparers

By Margaret Dreschel, J.D. Candidate 2015 | Posted on

Earlier this month, a federal judge effectively halted the IRS’s proposed multi-million dollar initiative to regulate tax preparers.  The magnitude of the blow became clear on Friday when the IRS asked the court to reconsider its permanent injunction on the initiative, citing the $50 million already spent on launching the program, $100 million already collected in fees, and over 100,000 tax preparers currently registered to take a competency test.  If the decision stands, the IRS not only faces these tremendous losses, but also potential class-action lawsuits from tax preparers and breach-of-contract costs.

U.S. District Court Judge James Boasberg for the District of Columbia previously issued a permanent injunction prohibiting enforcement of the agency’s rules requiring licenses for all previously unregulated tax preparers.  Judge Boasberg found that the IRS over-stepped its statutory authority by including tax preparers in the category of persons who “practice before the IRS” and are thereby subject to its regulations.  This was a victory not only for the three tax preparers who filed the suit last year with the help of the libertarian law firm Institute for Justice, but also for the estimated 600,000 tax preparers who would have been subject to the licensing rules starting this year.  The IRS’s proposed rules are available for viewing here, and the U.S. District Court’s opinion is here.

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Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

This week, Manatt has a guide on “How to Handle Confidential Investigations of Bank Activities,” published in the ABA Banking Journal. The guide explains how banks should handle potentially suspicious transactions identified during a safety and soundness examination. The guide stresses that while not every suspicious transaction warrants a full outside investigation, those involving “significant employee or customer negligence or misconduct, or violations of law or regulations” likely require such an investigation. The guide explains the requirements for planning, conducting, and ensuring regulatory compliance throughout the investigation.

Last week, Gibson Dunn published its “2012 Year-End Securities Enforcement Update,” including some interesting findings. Keeping pace with last year, the SEC filed 734 enforcement actions extracting more than $3 billion in penalties and disgorgement. The update notes, however, “the SEC confronted significant challenges in litigating previously filed enforcement actions against individuals in cases related to the financial crisis.”  These challenges aside, the SEC significantly increased actions against investment advisors and broker-dealers, bringing 147 and 134 cases against each, respectively. The update breaks down the enforcement actions, explaining in detail the types of entities and conduct likely to raise the ire of the SEC.

Among other tax changes, the American Taxpayer Relief Act of 2012 extends the 100 percent capital gain exclusion for “qualified small business stock.” This exclusion originally was implemented as part of the Internal Revenue Code of 1986, but only excluded from capital gains tax 50 percent (in some cases 75 percent) of gains from the sale of qualified small business stock. The Small Business Jobs Act of 2010 increased the exemption to 100 percent and increased the time frame in which the deduction applied. The recent Taxpayer Relief Act extended the exemption period to January 1, 2014. In a recent Client Alert, Latham & Watkins explains the requirements of “qualified small business stock” and the benefits and limitations of the exclusion. The Client Alert is available for download here.